Reinvesting in your business vs. Personal savings
How do you determine the right amount to reinvest in your business versus saving for personal income?
Forum Discussion
As of now there is no clear line and all of the earnings are going in to the reinvesting in the business.
Totally understandable, especially when you're focused on growth! How do you prioritize what to reinvest in first—equipment, marketing, staff?
Before deciding where to reinvest, evaluate the current state of your business. Identify what areas are most critical to your short-term success or long-term growth.
- Is your business lacking in efficiency or productivity? If your processes are slow, inefficient, or causing customer dissatisfaction, investing in equipment or technology that improves operations might be your priority.
- Are you having trouble attracting new customers? If your sales pipeline is weak or you’re not generating enough leads, marketing should be a top priority.
- Do you have too much work and not enough people to handle it? If you're struggling to meet demand or provide the level of service you want, investing in staff or hiring more workers could be essential.
So, for efficiency--equipment; for growth--Marketing; for service--invest in your team.
There is definitely no right answer for this one!! For me, this has always been a reflection of where I was in my business journey - starting up and/or growing typically makes it harder to pay yourself handsomely. Ultimately, unless you are about to sell or move on from your business, if you aren't properly reinvesting in your business, you will likely loose the ability to save for personal income sooner rather than later.
Reinvest as much as possible until your personal needs are comfortably met, and you're not stressed about basic living expenses. Anything beyond that should go back into the business. Why? Because the return on reinvestment in a growing business is almost always higher than what you'd get by sitting on cash or putting it in low-yield investments.
If you're taking more out of the business than you need, you're slowing its growth. Only save for personal income once the business is a cash machine that works without you constantly feeding it. Until then, prioritize growth.
A common approach used by many business owners is the 50/30/20 rule:
- 50% for Reinvestment: Use 50% of profits for business reinvestment to support growth.
- 30% for Personal Income: Pay yourself a reasonable salary or draw based on business performance.
- 20% for Savings and Taxes: Allocate at least 20% of profits for savings (both personal and business) and tax payments.
This balance will vary based on the stage of your business and personal financial goals. The key is ensuring that the business has enough to continue growing while you meet your personal financial needs.
Consider Tax Implications
- Reinvesting and Tax Benefits: Reinvesting in your business (e.g., purchasing equipment, marketing, or expansion) can provide tax deductions, reducing your taxable income. It’s important to work with an accountant or tax advisor to understand these benefits and plan accordingly.
- Personal Taxes: Ensure that you’re also setting aside enough for personal taxes. As a business owner, taxes can be complex, and it’s essential to plan for both business and personal tax obligations.
Good luck to you. My dad taught me, "Pay yourself first" and recommended that no matter what my income was, that I should always save 10% of my income--personal or business--for the "rainy days." It was in business school that I learned the 50/30/20 rule.
